Patiently bullish on gold and copper as crude consolidates
Saxo’s Weekly Commodity Update
By Ole Hansen, Head of Commodity Strategy at Saxo
The commodity sector remains under pressure this month and is currently heading for its sixth consecutive monthly decline with the Bloomberg Commodity Total Return Index trading near the lowest levels since January 2022. Losses so far this month has primarily been driven by energy and industrial metals in response to continued concerns about the global economic outlook and specifically the pace of the recovery in China which has proven to be less commodity intensive than previous government supported growth sprints.
Overall, the index, which tracks the performance of 24 major commodity futures contracts, spread evenly between energy, metals and agriculture, trades down around 2.5% on the month with broad losses being led, almost as per usual, by natural gas in the US and Europe, amid ample supply and softening demand into the summer months. Also, near the bottom of the table we have crude oil which following a massive roller coaster couple of months, that included a banking crisis, a surprise OPEC+ production cut and China demand worries, now trades near a low for the cycle.
The weaker-than-expected outlook for China has also helped send industrial metals sharply lower with copper, a continued long-term favourite amid green transformation demand and lack of resilient supply, suffering a setback that was accelerated by speculative selling once a key technical level gave way.
Copper and silver, two major casualties during a week of risk adversity
Copper futures fell to its lowest level in seven months on rising concerns over the health of China’s economy. Selling accelerated once key support-turned-resistance at $3.80/lb was broken for the first time in four months, thereby supporting fresh selling by momentum-based funds and hedge funds already holding a net short position in the futures market. The next key level of support remains at $3.6680/lb, the 61.8% retracement of the October to January rally.
At Saxo, however, we view the current setback in copper as temporary as the green transformation theme in the coming years will continue to provide a strong tailwind for copper, the best electrical-conducting metal towards the green transformation which includes batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Not least considering how producers face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds.
The copper weakness triggered a 5% sell off in silver, the biggest one-day loss since February 2021, with selling accelerating after the metal broke support at $24.50. Having shown resilience following the 31% March to April rally, correction risks have been rising and while the chart action looks bad, we will characterize it as a normal and almost unavoidable correction following a 31% strong rally between March and May. In terms of support, traders will now be focusing on $23.72, the 38.2% retracement of the mentioned rally while a move back above $24.5 will be needed to stabilize the market.
Patiently bullish on gold
The general weakness across the industrial metal sector, including silver, saw profit taking drive the gold price back towards a key area of support. Recently established longs following the softer CPI print lifted expectations for a Fed pause got caught offside and with silver tumbling 5% the risk of a deeper correction began to emerge. However, mounting fears of the US debt ceiling, de-dollarization flows, geopolitical tensions, expectations for rate cuts later this year remain key reasons why the yellow metal is currently holding up very well. That can be seen through the gold-silver ratio, which jumped to 84 (ounces of silver to one ounce of gold) and highest since March 29. Strong fundamentals aside, the short-term direction of gold will be determined by flows, the dollar and direction of US short-term rates and bond yields.
Since the March banking crisis helped sent rates and yields sharply lower, hedge funds have increased their net long position in COMEX gold futures to a 13-month high. With the most recent increase in the week to May 2 primarily being driven by fresh longs, as opposed to short covering, the long-short ratio reached a three-year high at 7.1 long per short position. The value-weighted average gold futures price (VWAP) during that reporting week was $2002.50, highlighting the level below which recently established longs may begin to exit their positions. Below that level additional support can be found at $1990 ahead of the big one at $1950 while resistance remain firm above $2050.
Crude oil: demand concerns still weighing
Crude oil spent the week consolidating following an early May slump that was the culmination of weeks of weakness following the surprise OPEC+ production cut on April 2. Weak refinery margins raising the prospect for lower crude oil demand, China growth concerns and traders being forced out of longs that was initiated following the OPEC production cuts all played their part in sending prices sharply lower. Once support at $80 in Brent and $76 in WTI broke, the floodgates opened and a March-style sell-off driven by fresh short selling followed before support was found near the March lows, potentially raising the prospect for price supportive double-bottoms being established.
In the short term, weak demand concerns continue to pile up for the crude oil market, with US economic data on cooling inflation and labor market conditions further igniting slowdown concerns and China’s inflation and credit data also pouring water on the China demand surge hopes. There were however also some reports that underpinned oil prices later this week, most notably US energy secretary Jennifer Granholm saying the government aims to purchase oil to refill the Strategic Petroleum Reserve after a congressionally mandated drawdown ends in June. OPEC meanwhile increased its outlook for China’s 2023 oil demand, thereby supporting expectations for a rise in global demand of 2.33mb/d, a prediction that contradicts the current downward trend in oil prices.
For now, crude oil remains challenged and a lot of work in terms of stabilization and consolidation is needed to change that. We would consider a move back above the mentioned levels, most notably the psychologically important $80 level in Brent as a sign of emerging stability.
